Articles Posted in Contract Law

Office Lease: No signature, no personal guaranty

July 9, 2014 | Michael R. Smith

BJ Thompson Associates, Inc. leased an office from Jubilee Investment Corp. The lease included the following language:

Guaranty of Performance In consideration of the making of the above Lease by LANDLORD with TENANT at the request of the undersigned Guarantor, and in reliance by LANDLORD on this guaranty the Guarantor hereby guarantees as its own debt, the payment of the rent and all other sums of money to be paid by TENANT, and the performance by TENANT of all the terms, conditions, covenants, and agreements of the Lease, and the undersigned promises to pay all LANDLORD’S costs, expenses, and reasonable attorney’s fees (whether for negotiations, trial, appellate or other legal services), incurred by LANDLORD in enforcing this guaranty, and LANDLORD shall not be required to first proceed against TENANT before enforcing this guaranty. In addition, the Guarantor further agrees to pay cash the present cash value of the rent and other payments stipulated in this Lease upon demand by LANDLORD following TENANT being adjudged bankrupt or insolvent, or if a receiver or trustee in bankruptcy shall be appointed, or if TENANT makes an assignment for the benefit of creditors.

Even though the above language referred to “the undersigned Guarantor,” the lease had no signature block for a guarantor. It had signature blocks for only the landlord and tenant. The signature block looked like this

BJ Thompson Associates, Inc.

By: ____________________
Date: __________________

followed by the address for BJ Thompson Associates, Inc. and the word “TENANT.” It was signed by BJ Thompson, the sole shareholder and president of BJ Thompson Associates, Inc.

The original term of the lease was for one year, but the tenant held over for a number of years. (In essence, the lease was automatically renewed for successive one-year terms.) Eventually, however, the tenant moved out three months into the year and stopped paying rent. The landlord sued both BJ Thompson Associates, Inc. for rent for the remaining nine months, and it also sued BJ Thompson personally on the theory that he had personally guaranteed his company’s obligations under the lease. The trial court dismissed the complaint against BJ Thompson personally because he had signed the lease only on behalf of his company as tenant and not on his own behalf as guarantor. In an unpublished opinion, the Court of Appeals agreed.

A guaranty is a promise by one person to pay the obligations of another person. When landlords sign leases with small businesses, it is common for them to require the lease to be personally guaranteed by the business owners, and the same thing occurs with other types of contracts as well. A guaranty is simply a particular type of contract, and it is governed by the same rules that apply to the interpretation and enforcement of other contracts. However, a guaranty is also one of several types of contracts subject to the statute of frauds, which says that, in order for a contract to be enforced, the contract must be in writing and must be signed by the party against whom it is being enforced.

In this case, the lease included language obligating “the undersigned Guarantor,” but it did not identify BJ Thompson as the guarantor, and, although BJ Thompson signed on behalf of his company, the tenant, nothing in the lease identified his as the guarantor and nothing in the signature blocks indicated that he was signing in any capacity other than as the agent of his company.
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The Confusing Status of the Indiana Statute of Limitations for Breach of Written Contracts

March 21, 2014 | Michael R. Smith

Suppose that eight years ago, you hired a construction contractor to build an addition to your house in Indiana. Shortly after the construction was finished, you noticed that the roof shingles on the addition weren’t quite the same color as those on the rest of the house. You checked the bundle of extra shingles that the contractor left behind and compared the information on the label with the specification in the contract. Sure enough, the contractor used the wrong shingles. Not only were they the wrong color, but they were also a lower quality than the contract specifications required. Even so, you were busy at the time and never got around to calling the contractor to get him to correct the mistake. Now you have a potential buyer for the house who is threatening to back out of the deal unless you replace the shingles. You call the contractor and demand that he correct his mistake. He refuses, saying it is too late for you to complain about the problem, that you should have called him as soon as you noticed it. Are you out of luck or not?

Statutes of Limitations

The key to answering the question is to determine the applicable statute of limitations. A person who has the right to sue someone for breach of contract (or, for that matter, the right to sue for other reasons) cannot wait forever to do it. How long the person can wait is determined by the statute of limitations that applies to the particular type of claim. In Indiana, there are two different statutes that might apply to the situation described above:

Section 34-11-2-9 of the Indiana Code provides that the statute of limitations for breach of “promissory notes, bills of exchange, and other written contracts for the payment of money” is six years.
Section 34-11-2-11 of the Indiana Code provides that the statute of limitations for breach of written contracts other than those for the payment of money is ten years.

Which one applies?

It has been more than six years, but less than ten, since the addition to your house was finished and you noticed the problem with the shingles. Which statute applies?

Certainly your construction contract called for the payment of money, but don’t most contracts do that? Is every contract that requires payment of money subject to the six-year statute of limitations, regardless of the rest of the contract? If so, that leaves the ten-year statute of limitations to cover only those contracts that do not involve the payment of money at all. On the other hand, maybe the idea is that the six-year statute of limitation covers contracts that do not involve anything other than the payment of money.

Surprisingly, there are very few published Indiana court decisions that address the question of which written contracts are covered by the six-year statute of limitations and which are covered by the ten-year statute, even though those statutes originated in 1881. However, the Indiana Supreme Court addressed the question with respect to an earlier version of the statutes in 1923.

The Ten-Year Limitation

The case was Yarlott v Brown, 192 Ind. 648, 138 N.E. 17 (1923), and the question was the statute of limitations on a mortgage. (At the time, the two statutes of limitation on written contracts were 10 years and 20 years, rather than 6 years and 10 years. Yarlott involved a lawsuit that was brought more than ten years, but less than 20 years, after the loan was supposed to be repaid.) Even though people commonly refer to the loans they take out to buy their homes as “mortgages,” in reality the mortgage is actually a document that reflects the lender’s right to foreclose on the property if the loan is not repaid; the obligation to pay the loan itself is set out in another document, called a note. However, in Yarlott, even though the mortgage was accompanied by a note, the mortgage contained not only the right of the lender to foreclose; it also repeated the obligation to repay the loan. It was clear that the statute of limitations on the note itself — a written contract for the payment of money — expired after ten years. But what about the mortgage? If it had not mentioned the repayment of the loan, it would have been subject to the longer statute of limitations. Did the fact that it repeated the obligation to repay the loan move it to the shorter limitation, the one that applied to “promissory notes, bills of exchange, and other contracts for the payment of money”?

The Indiana Supreme Court said no, the 20-year statute of limitations applied to the mortgage, despite the fact that it also provided for the payment of money. The Court reasoned that

. . . a mortgage differs in essential particulars from a promissory note, bill of exchange, or other written contract for the payment of money of the same kind as notes and bills. On the other hand, many actions which may be brought on such a mortgage bear a close resemblance to actions for the collection of judgments of courts of record, which are liens on real estate, or to actions for the recovery of possession of real estate. A familiar rule of statutory construction is that, where words of specific and limited signification in a statute are followed by general words of more comprehensive import, the general words shall be construed to embrace only such things as are of like kind or class with those designated by the specific words, unless a contrary intention is clearly expressed in the statute.

The underlining in the above quotation is ours, not the court’s, but those words are the key to understanding the decision. The shorter statute of limitations applies to written contracts that are similar to promissory notes and bills of exchange.

Now what about your construction contract? Even though it involves the payment of money, a construction contract is very different from a promissory note or bill of exchange. Doesn’t that mean that the applicable statute of limitations is ten years and that you still have the right to expect the contractor to pay for the cost of replacing your shingles? Well, maybe not.

Or is it the six-year limitation?

In 1991, the Indiana Court of Appeals stated that a teacher’s contract — which is also very different from a promissory note or bill of exchange — was a contract for the payment of money and therefore subject to the statute of limitations of six years, not ten. Aigner v Cass School Tp, 577 N.E.2d 983 (Ind. App. 1991). The decision did not even mention Yarlotte v. Brown or the possibility that the period of limitations might be ten years instead of six, maybe because the lawsuit regarding the teacher’s contract was brought within two years, so it was not barred regardless of which statute of limitations applied.

So where does that leave your claim against your former contractor? If a teacher’s contract is subject to a six-year statute of limitations, isn’t your construction contract also subject to a six-year limitation? It certainly seems so. But if you sue the contractor, you may be able to persuade the court that the Court of Appeals discussion of the statute of limitations governing the teacher’s contract was simply wrong because it was inconsistent with the precedent set by the Indiana Supreme Court in Yarlott v. Brown. Alternatively, you might argue that, because the contract in Aigner was valid under either statute of limitations, the court’s mention of the six-year statute of limitation is dictum and therefore not binding precedent. Unfortunately, you might have to go all the way to the Indiana Supreme Court to get a favorable decision on either rationale.

On the other hand, the decision in Aigner has been around more than 20 years, and it has not been overturned yet. Indiana courts may continue to follow Aigner for most written contracts, narrowly applying Yarlott to those that, even though they involve the payment of money, “bear a close resemblance to actions for the collection of judgments of courts of record, which are liens on real estate, or to actions for the recovery of possession of real estate.” All we can say is that anyone with a claim for breach of a written contract that involves any payment of money is far better off to file the lawsuit within six years; to wait longer is, at best, risky.

We invite others who may be able to shed light on this question to send us a message using the contact form on this page.
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Social Media and Two Remarkably Unremarkable Contract Cases

December 15, 2013 | Michael R. Smith

Consider these two relatively recent cases, one from Massachusetts and one from Indiana, both involving allegations of breach of contract through the use of social media:

A vice president of a recruiting firm leaves her job and goes to work for another recruiting firm. She has a covenant not to compete with her first employer that prohibits her from providing recruiting services within a specified list of “fields of placement” and within a specified geographic area. She updates her LinkedIn profile to reflect the new job. A message goes out to her list of over 500 contacts, including a number of her former employer’s customers. Her former employer sues, alleging (among other things) that her LinkedIn update violated the covenant not to compete.
The agreement between an IT contractor and one of its subcontractors prohibits the subcontractor from soliciting or inducing the contractor’s employees to leave their jobs. The subcontractor posts a job opening on LinkedIn where it could be viewed by anyone who had joined a particular public group. One of the contractor’s employees sees the job posting, contacts the president of the subcontractor, and expresses an interest in the job. At a later meeting, the employee tells the subcontractor his compensation requirements and what he is looking for in a job. The subcontractor makes an offer of employment, and it is accepted. The contractor sues the subcontractor for breach of the covenant not to solicit its employees.

Home Improvement Contracts

September 11, 2013 | Michael R. Smith

Indiana has a relatively little known statute, the Home Improvement Contracts statute located in Title 24, Article 25, Chapter 11 of the Indiana Code, that protects the customers of home improvement contractors by establishing certain minimum contract requirements. Home improvement contractors are well advised to ensure that their contracts comply with the statute because those who violate it may find themselves on the receiving end of a lawsuit under companion Chapter 0.5 (Deceptive Consumer Sales) filed either by their customers or by the Indiana Attorney General. This article describes only some of the statutory requirements, and home improvement contractors who want to make sure they comply should seek legal advice.

Applicability

The Home Improvement Contacts statute applies to contracts between a consumer and a “home improvement supplier” for any alteration, repair, replacement, reconstruction, or other modification to residential property, whether the consumer owns, leases, or rents the residence, but only if the contract is for more than $150. The statute defines “home improvement supplier” as someone who engages in or solicits home improvement contracts, even if that person does not actually do the work. For example, if a homeowner buys installed carpet from a carpet store, the contract to install the carpet is covered by the Home Improvement Contracts statute even if the store owner doesn’t actually perform the installation but instead subcontracts the work to someone else.

Contract Requirements

Not surprisingly, home improvement contracts must be in writing. Although the Home Improvement Contracts statute does not include an express requirement for a written contract, and although the definition of “home improvement contract” includes oral agreements, as a practical matter it is impossible for an oral contract to comply with the statute.

Section 10(a) of the Home Improvement Contracts statute includes a laundry list of requirements. For example, the contract must include the name of the consumer and address of the home; the name, address, and telephone number of the contractor; the date the contract was presented to the consumer; a reasonably detailed description of the work; if specifications are not included in the description, then a statement that specifications will be provided separately and are subject to consumer approval; approximate start and end dates for the work; a statement of contingencies that may seriously alter the completion date; and the contract price.

The requirement that the contract contain specifications (or a statement that specifications will be supplied later for approval by the consumer) deserves a little more attention. The statute defines specifications as “the plans, detailed drawings, lists of materials, or other methods customarily used in the home improvement industry as a whole to describe with particularity the work, workmanship, materials, and quality of materials for each home improvement.” Note that a specification must describe the work, workmanship, materials, and quality of materials with particularity.

Consider, for example, a contract to paint the exterior of a home. Does it comply with the requirement for a contract to contain specifications if the only description of the work is, “Paint all exterior siding and window frames with gray exterior latex paint”? Does that describe the work “with particularity”? Probably not. For example, it does not specify the number of coats of paint, obviously a significant consideration. Moreover, the specification of “exterior latex paint” is probably inadequate in light of the range of quality and prices of exterior latex paint available on the market, and “gray” is probably not specific enough either, given that paint stores carry a wide spectrum of colors that can reasonably be called gray.

Specific Requirements and Accommodations for Work Covered by Insurance

Section 10(b) of the statute deals with special issues presented by contracts to repair damage that is to be covered by an insurance policy. Several of the provisions provide alternative ways for the contract to comply with the general requirements listed in Section 10(a). For example, the requirement to include the start date can be satisfied by specifying that the repairs will begin within a specified amount of time after it is approved by the insurance company. Similarly, the contract price can be expressed by stating the amount owed by the consumer in addition to the amount of the insurance proceeds, and that includes a contract provision that the contractor will not charge the consumer any amount above the amount of the insurance proceeds. Note, however, that because of the prohibitions in Section 10.5 (discussed below), the consumer is responsible for any insurance deductible.

More importantly, Section 10(b) requires home improvement contracts for repairing exterior damage that covered by insurance to give the consumer a right to cancel the contract within three days of receiving notice from the insurance company denying coverage for some or all of the repairs. The contract must include some very specific language dealing with the right to cancel, and it also must include a form, attached to but easily removable from the contract, that the consumer can use to cancel the contract.

Prohibitions

Section 10.5 of the statute also contains some prohibitions that home improvement contractors need to know about. One has already been mentioned — contractors are prohibited from paying or rebating to the consumer any part of an insurance deductible or giving any sort of gift, allowance, or anything else of monetary value to the consumer to cover the insurance deductible, including things like referral fees and payments in exchange for the consumer allowing the contractor to place a sign in the yard.

As another example, Section 10.5(d) contains a blanket prohibition on home improvement contractors acting as public adjusters.
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Is Your Business’s Confidentiality Agreement Enforceable? Part 2

August 19, 2013 | Michael R. Smith

In a previous post we discussed a few basic principles of confidentiality agreements (also known as non-disclosure agreements or NDAs). That post discussed the basic of these agreements and the important principles of restrictive covenants and trade secrets. Left unanswered was the critical question: How long can, or should, a confidentiality obligation last?

Reasonable Periods of Confidentiality
Now let’s get back to the question of a reasonable amount of time for confidentiality obligations to last with respect to CBI that does not meet the definition of a trade secret. As discussed above, a factor is the nature of the CBI owners legitimate business interests that are protected by the agreement. An example of a legitimate business interest of the owner is to protect the confidentiality its cost of goods sold or COGS. Disclosure of that information to competitors may give them an unfair advantage when bidding for the business of new customers. But how long does that legitimate business interest last? That depends on the nature of the goods and the nature of the industry. In some industries, costs are sufficiently stable that knowledge of a company’s COGS from five years ago enables a competitor to make an accurate estimate of the company’s COGS today, and a court might consider a confidentiality period of five years to be very reasonable. In other industries, costs change much more quickly, and a court might find that a confidentiality period of five years is unreasonable and rule that the agreement is unenforceable — unless the COGS also meets the definition of a trade secret.

Here’s where things get more complicated because the definitions of CBI in most confidentiality agreements are not identical to the definition of a trade secret. In most cases, all trade secrets are also CBI, but not all CBI qualifies as a trade secret. So what to do?

One one might consider writing a confidentiality agreement that, for CBI that qualifies as a trade secret, lasts for as long as that is true and, for all other CBI, lasts for only, say, three years. And one can certainly write a contract with precisely that provision, but it will pose a dilemma for the recipient: The recipient will probably not be able to tell the difference between CBI that qualifies as a trade secret and CBI that does not. Here are some possible ways to resolve that dilemma.

The recipient may decide to simply live with the dilemma and assume that all CBI must be protected essentially forever. Some recipients find that acceptable.
The owner of the CBI may accept a time limitation for all CBI, including CBI that qualifies as a trade secret. However, that may create other problems for the CBI owner. Note the second part of the definition of a trade secret — it must be subject to reasonable precautions to protect its secrecy. Is it a reasonable precaution to disclose information under a confidentiality agreement that permits the disclosure or use of the information after a certain period of time? Some courts say no, with the result that the information loses its status as a trade secret.
The confidentiality agreement may impose a limit that applies to ALL CBI, but only if, and for as long as, the CBI qualifies as a trade secret. In that case, the owner accepts the possibility that some CBI may have no protection at all because it never qualifies as a trade secret. For some owners in some situations, that is a more acceptable risk than the possibility of having its CBI lose status as a trade secret.

In short, there is no single solution that works in every case. Each situation must be negotiated individually, with the interests of both sides of the agreement taken into account.
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Is Your Business’s Confidentiality Agreement Enforceable? Part 1

August 19, 2013 | Michael R. Smith

Confidentiality agreements (also known as non-disclosure agreements or NDAs) are common in today’s business world. They are sometimes in the form of stand-alone agreements, often used when two businesses are discussing a potential deal and at least one of them needs to disclose to the other information that is not available to the public (sometimes called confidential business information or CBI). Other times, they are embedded in agreements with a broader scope, such as employment contracts, service contracts, and contracts for the sale and purchase of a business.

The fundamental concept of a confidentiality agreement is simple. The person receiving or possessing the other person’s CBI promises not to disclose it to others and (usually) not to use the information for any purpose other than the discussions of a potential transaction or the purpose of the larger contract in which the confidential provision is embedded.

The details, however, can be tricky, and one of the thornier details is the question of how long the obligations of nondisclosure and nonuse last. Naturally, the person disclosing the CBI wants the commitments to last forever, but the person making the commitments wants them to expire at some point in time, not necessarily because he or she wants to use or disclose the information, but because he or she wants the possibility of being sued for breach to come to an end, and the sooner the better.

So how long can, or should, a confidentiality obligation last? Before answering that question, a little review of some legal principles is in order. Note that these issues are very fact-sensitive and that the law varies a fair amount from state to state. For that reason, this discussion is based on general concepts; the results may be very different in any particular case.

Restrictive Covenants
Confidentiality agreements are sometimes considered to be within a larger category of contracts known as restrictive covenants, i.e., agreements that in one way or another restrict commercial trade. With freedom of trade and commerce being so important to American society, restrictive covenants are not favored by public policy or the law. That doesn’t mean restrictive covenants are necessarily void or illegal, but they may be unless the restrictions are sufficiently narrow. At least some courts have held that confidentiality obligations can last for only a reasonable period of time (with an exception discussed below), and a confidentiality obligation that lasts too long may result in a court refusing to enforce the agreement.

Unfortunately, there are no clear rules to tell us what amount of time is reasonable for the duration of a confidentiality obligation. Instead, there are factors that must be weighed and balanced. Those factors include the nature of the legitimate business interests of the owner of the CBI; the effect of the restrictions on the person making the non-disclosure and non-use commitments; and the public interest.

So far we know that it may be necessary for a confidentiality obligation to expire after a reasonable period of time, and, if it doesn’t, the agreement may be unenforceable. HOWEVER, there is a major exception, and that exception is for CBI that also meets the definition of a “trade secret.”

Trade Secrets
Although “confidential business information” does not have a universal meaning,the definitions contained in most confidentiality agreements are broad enough to encompass “trade secrets,” a term defined by state statute. In Indiana, section 24-2-3-2 of the Indiana Code defines a trade secret as information that

has independent economic value because others who could obtain economic value from the information do not have the information and cannot reasonable acquire it; and
is the subject of reasonable efforts to maintain its secrecy.

Trade secrets are a form of intellectual property, and the trade secret statute provides protection against improper use or disclosure, in addition to the protection provided by a confidentiality agreement. Unlike most forms of intellectual property, such as patents, trade secrets never expire; they remain protected by statute for as long as the information continues to meet the definition. For that reason, some courts have ruled that the requirement for confidentiality agreements to be limited to a reasonable period of time is subject to an exception for trade secrets. To the extent a confidentiality agreement covers a trade secret, the confidentiality obligation is permitted to last forever, or at least for as long as the information continues to qualify as a trade secret under the statutory definition.

Here’s where that leaves us: With respect to trade secrets, confidentiality obligations do not need to expire. (In fact, as we’ll see later, they should not expire.) With respect to other CBI, confidentiality obligations may need to expire after a reasonable period of time to ensure enforceability. In the next article, we will consider how to deal with that bifurcation.
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Anticipatory Breach and Damage Mitigation: A Minefield for Real Estate Sellers?

June 25, 2013 | Michael R. Smith

July 17, 2014. Update. Today the Indiana Supreme Court reversed the decision of the Court of Appeals. Check back soon on the Indiana Business Law Blog for a discussion of the Supreme Court’s decision.

A ruling in a recent case, Fischer v. Heymann, illustrates the pitfalls one can encounter when selling real estate. By not changing a light bulb and pushing the little red button on a couple of electrical outlets, the seller lost over $90,000!

The Case
Gayle Fischer entered into a contract to sell a condominium to Michael and Noel Heymann for $315,000. The buyers could inspect the property and, if they found serious defects, cancel the sale unless she agreed to fix the problems. On February 10, 2006 the Heymanns demanded that Fischer fix some minor problems: a couple outlets weren’t working and a light bulb needed to be changed. Fischer wrote back on Feb. 13th, saying she’d respond by Feb. 28th. The Heymanns wrote back two days later, demanding a response by Feb. 18th. Fischer did not make any further replies until the 19th, when the Heymanns attempted to cancel the contract, and the lawsuit ensued, with Fischer claiming total damages of more than $94,000, including $75,000 in direct damages (which represented the difference between the agreed price of $315,000 and the best offer Fischer later received, $240,000.)

The Decision
The Court of Appeals applied two standard contract principles but to reach a result that may seem surprising. First, the buyers committed an “anticipatory breach”.or “breach by repudiation,” which occurs when one party declares its intent to breach the contract. Here, the Heymanns’ refused to buy the condo unless Fischer made repairs, which the Court of Appeals held was an anticipatory breach. (The Heymanns would have had the right to cancel the contract if the defects in the condo were serious, but they weren’t.) An anticipatory breach is treated the same as an actual breach. Fischer did not need to wait until Heymanns failed to show up at the closing.

Second, once a breach has occurred (anticipatory or otherwise), the other side has an obligation to mitigate damages, or to take reasonable steps to avoid ‘piling up’ additional damages. One way of mitigating damages when a buyer backs out of a real estate purchase is to attempt to find another buyer. Here, the agreed price was $315,000. If the best price Fischer could get from another buyer was $300,000, the Heymanns would have owed her only $15,000. However, if Fischer passed up the $300,000 offer and later sold it for only $240,000, the Heymanns would still owe only $15,000 because that’s what the damages would have been if Fischer had mitigated.

Although the Court of Appeals did not describe its analysis quite this way, it essentially treated the Heymanns demand for repairs as a breach of the original purchase agreement and a new offer to buy the condo for the same price after the repairs were made, repairs which cost only $117 — the price for an electrician to make a service call to reset the ground fault interruptors and change a light bulb. Certainly, if, immediately after the Heymanns breached, a third person had offered to buy the property for the same price, less $117, mitigation of damages would have required Fischer to accept it. The Court of Appeals held that mitigation of damages required Fischer to make the repairs requested by the Heymanns. Result: The Heymanns owed Fischer $117, not $94,000!

Note that these principles apply to contracts in general, not just to real estate purchase agreements. Does it surprise you that one party can make the other party choose between accepting an amendment to the contract or collecting damages that are worth no more than the amendment? That’s effectively what happened in this case, and it surprised the Court of Appeals judge who dissented from the decision. I don’t know if Fischer’s lawyer has petitioned to transfer the case to the Indiana Supreme Court. If so, it will be interesting to see if the Supreme Court accepts the case. And if the decision stands, it will be interesting to see how later Indiana court decisions apply Fischer to other situations.
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Construction Manager Liability: Part three

September 7, 2012 | Michael R. Smith

I explained in my last two posts how construction managers can be subject to liability when a construction contractor’s employee is injured. Ordinarily, the construction manager has no duty to provide a safe workplace for the employees of a construction contractor and, therefore, is generally not liable for injuries to those employees. However, a construction manager can assume a duty to those employees in one of two ways — either by contract or by actions — and end up with liability for injuries.

For that reason, some construction managers have been reluctant to have any involvement with safety programs. By drafting contracts carefully, a construction manager can be fairly certain of not assuming a duty contractually, but it is difficult to know exactly what actions a construction manager can or cannot take without incurring liability. The Plan-Tec and Hunt cases discussed in our last post create some certainty. Specifically, a construction manager may take on contractual commitments to perform certain actions without assuming a duty to the employees of construction contractors and, consequentially, without incurring liability it would not otherwise have.

However, the construction management must avoid contractually undertaking to be the “insurer of safety for everyone on the project.” Here are some examples of what a construction manager should include in the construction management contract:

(a) To “make certain its avoidance of liability” the court in Hunt said a construction manager can include a provision with language expressly disavowing responsibility for job-site safety (EX: “in no case shall…the Construction Manager…have either direct or indirect responsibility for matters relative to Project safety.”).

(b) In Plan-Tec, the court held that the construction manager had not assumed a duty because the construction management contract “unequivocally state[d] that the contractors were to have the responsibility for project safety and the safety of their employees.” This language demonstrates that the responsibility for project safety belonged to the construction contractors, not the construction manager.

(c) Hunt’s contract stated that the construction manager’s services were “rendered solely for the benefit of the [Project Owner] and not for the benefit of the Contractors, the Architect, or other parties performing Work or services with respect to the Project.” This confirmed that no one but the Project Owner, not even a subcontractor’s injured employee, could expect to “benefit” from Hunt’s contract with the Project Owner or claim the contract obligated Hunt to assure their safety.

(d) Hunt’s contract provided that Hunt was not “assuming the safety obligations and responsibilities of the individual Contractors,” and that Hunt was not to have “control over or charge of or be responsible for…safety precautions and programs in connection with the Work of each of the Contractors, since these are the Contractor’s responsibilities.” In addition, it said that the construction contractor was the “controlling employer responsible for its own safety programs and precautions,” and Hunt’s responsibility to review, monitor, and coordinate those programs did “not extend to direct control over or charge of the acts or omissions of the Contractors, Subcontractors, their agents or employees or any other persons performing portions of the Work and not directly employed by Hunt.” This proved that Hunt was not vicariously liable for a subcontractor’s negligence in executing its own safety precautions.

Given the above contract provisions which help construction managers to avoid contractually assuming responsibility for job-site safety, consider one related reminder about avoiding liability as a result of actions. Remember how construction managers can become liable when they voluntarily perform safety obligations beyond what they previously agreed to in the construction management contract? For this reason, one last contract provision which would benefit construction managers could require that, if the project owner demands that construction manager begin to perform additional safety obligations, such new obligations would first be incorporated into the original contract via an amendment. This would serve as a contractual way to manage the risk of that other means of incurring liability – the construction manager’s actions.

Now, here are some examples of what a construction manager seeking to avoid liability should not include in a construction management contract:

(a) Provisions by which the construction manager accepts the “duty to maintain safety on the project.”

(b) Provisions providing that the construction manager is responsible for the contractors’ compliance with state and federal regulations. A provision like that could show that the construction manager was undertaking legal oversight of the subcontractors. As recounted in point (d) above, construction managers can safely contract to review, monitor, and coordinate safety programs and precautions, but not to be responsible for those programs as the “controlling employer.” The important inquiry is whether the construction manager has agreed to ensure contractors’ compliance with the law or whether the construction manager has only agreed to monitor contractors’ compliance for the project owner.

(d) Language such as: The construction manager “shall take all necessary precautions for the safety of employees on the work.”

(e) Language such as: The construction manager “shall take all necessary precautions for the safety of all employees on the project.”

Ultimately, the Indiana Supreme Court held that even though Hunt had agreed to some safety-related responsibilities in the original contract, those responsibilities didn’t invoke “vicarious liability.” In doing so, the court chose to further the policy of providing “a way of promoting safety without exposing contract managers to suits like this one,” rather than encourage construction managers to avoid taking on any responsibility for promoting job-site safety for fear of incurring liability.
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Construction Manager Liability: Part two

July 18, 2012 | Michael R. Smith

As discussed in my last post, general contractors and construction managers have very different roles in a construction project. General contractors are sometimes sued when their subcontractor’s employees are injured on the job, but that’s not as often the case for construction managers. In addition, the liability analysis is quite different for construction managers because, unlike general contractors, construction managers do not have overall responsibility to perform the construction and they generally only contract with project owners, not with other subcontractors. A recent Indiana Supreme Court opinion, (“Hunt Construction Group, Inc. v. Garrett“) (“Hunt“)sheds light on the analysis of construction manager liability.

The opinion concluded litigation which had arisen out an accident which occurred during the construction of the Lucas Oil Stadium. In Hunt, a subcontractor’s employee was injured and subsequently sued the construction manager (“Hunt”). The Hunt court based its analysis on Plan-Tec, Inc. v. Wiggins (“Plan-Tec“), the first reported case in Indiana where the employee of a subcontractor sued a construction manager. Indiana courts use Plan-Tec as a “template” to evaluate claims of negligence against construction managers for injuries suffered by subcontractors’ employees, and the central test of the template specifically says that “a construction manager owes a legal duty of care for job-site employee safety in two circumstances: (1) when such a duty is imposed upon the construction manager by a contract to which it is a party, or (2) when the construction manager assumes such a duty, either gratuitously or voluntarily.'” Thus, a court will determine whether a construction manager is liable for the employee’s injury based on the construction manager’s contracts and actions, and only one of these is necessary to prove liability.

Three things in Plan-Tec led the court to find no contractual liability for the construction manager: (1) The construction manager’s contract did not specify that the construction manager had any safety responsibilities, (2) the subcontractor’s contracts clearly indicated they had responsibility for project safety and the safety of their employees, and (3) the subcontractor’s contracts expressly disclaimed that the construction manager had any direct or indirect responsibility for project safety.

Unlike in Plan-Tec, in Hunt, the construction manager’s contract did impose some general safety-related responsibilities on the construction manager. For example, Hunt was responsible for approving contractors’ safety programs, monitoring compliance with safety regulations, performing inspections, and addressing safety violations. Hunt also had the ability to remove any employee or piece of equipment deemed unsafe. However, the court determined that none of the safety-related provisions imposed on Hunt a specific legal duty to or responsibility for the safety of all employees at the construction site. Instead, the contract included “clear language limiting [Hunt’s] liability” which persuaded the court that the construction manager did not have a legal duty of care to subcontractor’s employees for job-site safety. We will explore that specific contractual language which limited Hunt’s liability in the next post.

But even if construction managers are not liable because of their contracts, they can still, by their actions or conduct, assume “a legal duty for job-site employee safety.” In Plan-Tec, it was Plan-Tec’s assuming of new supervisory duties beyond those required by the initial construction documents and after the project had already begun which raised the issue of whether it had assumed by its actions such a legal duty of care. For example, Plan-Tec took on extra responsibility by appointing a safety director, initiating weekly safety meetings, directing that certain safety precautions be taken by the subcontractors, and daily inspecting the scaffolding (which scaffolding ultimately injured the employee in that case). However, in Hunt, the court affirmed that the Plan-Tec ruling does not mean that a construction manager must avoid all such responsibilities in order to avoid liability for workplace injuries. In fact, Hunt had equally undertaken each of the previously mentioned actions taken by Plan-Tec. The difference was that, in Hunt’s situation, none of these actions were beyond those required by the original construction documents, and (as discussed above) those documents limited Hunt’s liability. This simple fact indicated to the court that Hunt did not by its actions assume a legal duty for the employee’s safety. Because Hunt neither assumed a duty by its contracts nor its actions, Hunt prevailed.
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Construction Manager Liability: Part one of a three-part series

July 5, 2012 | Michael R. Smith

When it comes to occupational injuries, the construction industry is among the most dangerous. According to the Bureau of Labor Statistics, in 2010 there were more fatal occupational injuries in construction than in any other private industry sector. And when a worker is injured, it sometimes leads to a lawsuit.

In most cases, the workers’ compensation statue (in Indiana, Ind. Code 22-3) restricts the amount an injured worker can recover from his or her employer to the amount of workers’ compensation insurance, but it does not limit the amount the worker can recover from anyone else. See Ind. Code 22-3-2-13. For example, the workers’ compensation statute does not prohibit an employee of a construction subcontractor from recovering from the general contractor or a construction manager. It is not uncommon for general contractors to be sued when their subcontractor’s employees are injured on the job, and there are a number of reported cases in Indiana dealing with that type of claim. However, in the recent case of Hunt Construction Group, Inc. v. Garrett, the Indiana Supreme Court had an opportunity to address the liability of a construction manager. I’ll discuss that case in the next couple of postings, but first let’s look more closely at the difference between a general contractor and a construction manager.

Although the roles of construction managers and general contractors are sometimes confused, they are really very different. A general contractor has the obligation to the owner of a construction project to perform the work necessary to complete the project. In most cases, of course, a general contractor does not actually do all the work but rather subcontracts at least part of the work to one or more subcontractors (for example, to an electrical subcontractor or a mechanical subcontractor). In other words, the general contractor works for the owner, and the subcontractors work for the general contractor. The owner pays the general contractor for the entire cost of the project, and the general contractor pays the subcontractors out of the amount it receives from the owner. If a subcontractor makes a mistake, the general contractor is accountable to the owner for that mistake, just as if the general contractor made the mistake itself. Naturally, managing its subcontractors is an inherent part of a general contractor’s job, and the general contractor has a great deal of direct control over the subcontractors.

Sometimes, however, the owner of a project hires a construction manager to oversee the construction project and to coordinate the work of all the various contractors and subcontractors on the project. Unlike a general contractor, a construction manager is not responsible for actually building the project. The construction manager essentially acts as the owner’s on-the-site representative with responsibilities such as managing the budget, the schedule, and the contract documents; sending out bid requests and receiving bid submissions; approving subcontractors when they are hired; inspecting and approving the work; and more. There may also be a general contractor with responsibility for constructing the entire project, or the owner may contract directly with companies that would otherwise be subcontractors (e.g., electrical and mechanical subcontractors) without hiring a general contractor.

Either way, the construction contractors and subcontractors do not actually work for the construction manager; instead, they work either for the general contractor or directly for the owner. The owner does not pay the entire construction price to the construction manager; the construction manager receives only a fee, and the owner pays the construction contractors and subcontractors either directly or through the general contractor, if there is one. The only authority the construction manager has to do anything related the construction is in its capacity as the owner’s agent.

In Hunt Construction Group, Inc. v. Garrett (“Hunt“), an employee of a subcontractor, Baker Construction Company, was injured and sued the construction manager, Hunt, claiming that Hunt was vicariously liable for Baker’s actions and that Hunt negligently breached its own duty of care for job-site safety. In the next entry, we’ll see how that case came out, and in the third entry we’ll look at things a construction manager can do to minimize its exposure to liability for injuries to construction workers.
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